Labour anger over Scotland Yard's conduct of the collapsed investigation into cash for honours burst into the open last night when one of Tony Blair's closest allies accused the police of using media leaks during the inquiry "to create a false impression of Tony Blair and undermine the public trust in the government".

The allegation was made by European commissioner Peter Mandelson, a close friend of Mr Blair. Police were also accused of "disgraceful treatment" of some Downing Street aides by former No 10 director of strategic communications Benjamin Wegg-Prosser.

Blair allies pointed out that the then prime minister came within a whisker of being forced to resign when Detective Assistant Commissioner John Yates said he intended to interview Mr Blair under caution. Mr Yates agreed to back down following representations by the Cabinet Office, it was confirmed yesterday.

Lord Levy, Labour's chief fundraiser and the man thought likely to be charged, also vented a fraction of his anger at the leaks when he expressed his relief at the Crown Prosecution Service's decision, formally announced yesterday, not to mount a prosecution. He added he had been disappointed by the constant media leaks that he described as "misleading, factually inaccurate and personally damaging". Greeting the news that he would not face charges, Lord Levy said: "For the last 16 months the people closest to me have had to endure the intensity and pressure of this long investigation. We are all relieved it is over."

Although the saga ended in relief for the Blair camp, another aide, Lady Morgan, admitted that the former prime minister's authority had been undermined by constant media coverage.

But Mr Blair ordered his aides to react with restraint, urging them not "do a Campbell", and repeat the aggressive tone of his attacks on the BBC in the wake of the Hutton report into the death of David Kelly. In a statement yesterday, Mr Blair said: "Those involved have been through a terrible, even traumatic time. Much of what has been written and said about them has been deeply unfair. I want to make it clear that I level no criticism at the police. They were put in an invidious position by the SNP complaint and had a very difficult task to perform."

Gordon Brown, anxious to draw the affair to a close, also defended the police.

Despite Mr Blair's calls for restraint, Mr Mandelson voiced the anger widespread in the Blair circle at the manner of the investigation. He said: "Those who undertook this investigation used the media to create a false impression of the then prime minister, and to undermine public trust in the government. I feel sorry for those individuals who were targeted, but I feel even sadder for the lasting damage that has been done to British politics."

The police, forced on the defensive after their £1m investigation, mounted a counter-offensive. They asserted privately that the Crown Prosecution Service cooled in its attitude four weeks ago, after previously being minded to press charges. Police sources did not imply the CPS had been leaned on politically.

But privately Scotland Yard is disappointed that the CPS has been so cautious and some senior Scotland Yard figures believe it lacked the courage to support a prosecution in such high-profile circumstances and took "the most pessimistic view" of circumstantial evidence that had been amassed.

"It was always going to be a difficult case, but the CPS just didn't want to take the risk," said one police source. "The jurors could have used common sense deciding certain issues, the CPS didn't give them the chance."

For a prosecution to go ahead, there has to be clear evidence of an agreement between two people to sell and buy an honour. For charges of conspiracy to pervert the course of justice to hold, there has to be a positive act designed to pervert the course of public justice. Inaction was insufficient, the CPS said.

Assistant commissioner John Yates said his duty was to search for the truth. He said: "It was absolutely proper that, when appropriate, police used the full range of powers at their disposal to gather the available evidence or potential evidence."

Mr Yates now faces three possible inquiries. There is likely to be an internal Scotland Yard inquiry, led by Sir Ian Blair, the Met commissioner; a more formal investigation by the Metropolitan Police Authority, and a renewed investigation by the Commons public administration select committee. Angus Robertson, the SNP leader in Westminster, claimed: "The idea that the Metropolitan police ... is a branch of the SNP is utterly preposterous."